Fiscal restraint probably on the table

With final figures on parliament’s make-up not due until 3 Nov, Westpac’s economists don’t see significant short term macro implications of the election outcome.

“We generally see coalition negotiations as pulling National towards a more contractionary stance as both potential partners advocate for greater fiscal restraint,” says chief economist Kelly Eckhold.

The first economic news for the newly elected coalition partners will be tomorrow’s CPI inflation figures. ANZ anticipates the report will highlight that the inflation problem is by no means solved and there are still questions around whether the 5.5% OCR is sufficient to get it sustainably back on target in an acceptable time frame.

The RBNZ noted at last month’s Monetary Policy Review the risk that rates “may need to remain at a restrictive level for a more sustained period of time.”

ANZ economists say while on one hand this acknowledges upside risks, it also indicates a preference for “higher for longer” rather than “higher” as long as there is deemed to be a choice. “The CPI data will be important in determining the RBNZ’s perceived options,” say the economists.

Important figures

Kiwibank says tomorrow’s Sept quarter inflation is important – the last inflation read for the year and a key release ahead of the RBNZ’s OCR decision in Nov.

“We expect consumer prices jumped 1.9% over the quarter alone,” Jarrod Kerr, Kiwibank chief economist, says. 

“The uptick in global oil prices, just as the fuel excise tax was re-applied, is the leading reason we expect an acceleration in the quarterly pace of price gains (following Q2’s 1.1% qoq).

Annually, Kerr sees inflation decelerating to 5.8% from 6%. “Our estimate is a little softer than the RBNZ’s.”

According to the Aug forecasts, the RBNZ is expecting a 2.1% quarterly rise and an unchanged annual rate of 6%.

“The RBNZ has adopted a data-dependent approach. And where next week’s print will land, will be key in deciding their next move,” he says.

Because of the uptick in petrol prices, Kiwibank is expecting imported (tradables) inflation to have risen 2.3% over the quarter – a quicker pace than last quarter’s 0.8%.

“Such a move, however, keeps the annual rate unchanged at 5.2% - a softer estimate than the RBNZ’s forecast rise to 5.8%.”

Kerr says tradables are out of the RBNZ’s control, however and the focus has shifted from imported to domestic inflation. “It’s domestic price pressures that they can influence. We expect a fall in non-tradables (domestic) inflation to 6.2% which should confirm that domestic inflation peaked at 6.8% earlier this year. The RBNZ expects the same. A print below 6.2% will likely weaken the view that interest rates may need to rise again.”

Higher but not much higher house prices

Meanwhile, on the housing side, CoreLogic chief property economist Kelvin Davidson says the election result probably means higher house prices over the next year or two than otherwise would have been the case, but he is not convinced the boost will be huge.

“Affordability is still a big problem, interest rates aren’t set to fall anytime soon and caps on debt-to-income ratios for mortgage lending are still on the cards for next year. “

He says for property investors looking at extra purchases, sure, a smaller tax bill helps. But given low rental yields and high mortgage rates, the top-ups from other income will still be significant.

ASB’s latest Housing Confidence report shows the existing environment is nuanced for prospective buyers.

ASB economist Nathaniel Keall, ASB economist says with the market no longer decelerating, there’s now less of a risk of buyers overpaying for an asset that quickly declines in value or finding themselves in negative equity.

He says there will be some Kiwis who think that after a 16% peak-to-trough decline, there are now some housing market bargains to be had, but on the other hand, with mortgage rates at high levels and unlikely to ease much any time soon, debt servicing is a real challenge for many.